YUM reported October comps for its China Division yesterday after the close.  Total China comps (-5%) and Pizza Hut comps (+10%) beat expectations, while KFC comps (-7%) missed expectations.  Overall, we view this as positive news.  Total comps improved 600 bps sequentially from September and the recovery appears to be on track, as October marked the first month in several that overall results have come in above expectations.  We expect China comps to be positive in November, December and throughout 2014, as the company begins building sales momentum and lapping easy comparisons.







As it stands, YUM is our favorite LONG in the big cap QSR landscape and, despite facing significant volatility over the past year, its long-term growth story remains intact.  As China same-store sales begin to accelerate meaningfully, we believe YUM’s earnings growth will follow suit and accelerate for the next year, and potentially longer, as margins begin to regain form.  We will be looking for more details on the pace and extent of the recovery during YUM’s Investor Conference on Wednesday, December 4, 2013 and will post on anything incremental following the meeting.






Howard Penney

Managing Director


[video] Keith's Macro Notebook 11/13: BOE, USD, CHINA

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What's New Today in Retail (11/13)

Takeaway: Athl. lags retail. Nice showing by Saucony. UA's major ad campaign. Kmart morphing into Rent-a-Center. Shareholder drags MW to JOSB table



M - Earnings Call: Wednesday 11/13 10:30 am

WMT - Earnings Call: Thursday 11/14 7:00 am

KSS - Earnings Call: Thursday 11/14 8:30 am




Athletic Footwear Data


Takeaway: The fact that sales were down 4.1% isn't as bad as fact that broader retail rebounded last week, as measured by yesterday's ICSC reading. The only brands with respectable readings are Saucony (WWW) and Skechers.


What's New Today in Retail (11/13) - chart1 11 13

What's New Today in Retail (11/13) - chart2 11 13

What's New Today in Retail (11/13) - chart3 11 13

What's New Today in Retail (11/13) - chart4 11 13

What's New Today in Retail (11/13) - chart5 11 13




UA - Under Armour unveils ‘Makes You Better’ campaign



  • "At an event in Denver, CO, Under Armour debuted 'Under Armour Makes You Better,' and highlighted the science behind ColdGear Infrared technology. Kevin Plank, Under Armour Founder and CEO, unveiled the new campaign with the help of world champion downhill skier Lindsey Vonn, freestyle skiing sensation Bobby Brown and reigning X Games champion and snowboard cross athlete Dominique Maltais."
  • "Co-branded with DICK'S Sporting Goods, the spot is narrated by Plank and features an all-star roster of athletes including Vonn, Brown, long track speedskating medalist Shani Davis, NFL star Cam Newton, phenom PGA golfer Jordan Spieth, distinguished outdoorsman and star of the hit A&E show Duck Dynasty Willie Robertson, and members of the U.S. Bobsled team. The fast paced and high-energy montage shows athletes battling extreme conditions and frigid temperatures with the help of Under Armour's new ColdGear Infrared apparel line."
  • "The newest chapter of the I WILL campaign will air during Monday Night Football on November 18th when the Carolina Panthers meet the New England Patriots at Carolina. It will continue to run on air and in digital platforms, including ESPN, NFL, Men's Health, Women's Health, Pandora, Stack and many more."


Takeaway: Plank and Vonn were all over the financial news networks yesterday. Make no mistake, Vonn is Plank's favorite athlete to use publicly (perhaps with the exception of Tom Brady) given that a) she's extremely marketable (to men), and b) her boyfriend is Nike's poster child.


UA - Under Armour unveils Canada's Olympic Snowboard Team getups


What's New Today in Retail (11/13) - chart6 11 13


MW, JOSB - Eminence Says Men's Wearhouse Open to Talks With Jos. A. Bank



  • "With just two days remaining before Jos. A. Bank Clothiers Inc.’s offer to buy the larger Men’s Wearhouse Inc. is set to expire, Ricky Sandler, chief executive officer of MW’s largest shareholder, Eminence Capital LLC, said that he’d received 'assurances' from MW ceo Douglas Ewert that the firm would review 'all strategic options available to the company, including a significant return of capital to shareholders and a merger with Jos. A Bank Clothiers Inc.'”
  • "In a letter sent to Ewert on Tuesday and immediately made public by Eminence, Sandler wrote, “We also expect you and the board, given the explicit commitment to explore all options, to actively engage with [Bank] before their deadline of Nov. 14, 2013.” Their conversation took place on Monday, according to the letter."


Takeaway: I'm sure the CEO loves the fact that his largest shareholder is telling him how to do his job. But in fairness, Eminence has been a holder for the better part of three years and until recently, the stock has been treading water. That's what MW management has to deal with for being a public company. A little accountability never hurt anyone.


SHLD - New Kmart Rent-to-Own Program Turns $300 TV Into $415 Buy



  • "Kmart is introducing a rent-to-own program charging the equivalent of 100-plus percent annual interest, a move into a business that has drawn criticism for hurting low-income consumers."
  • "The Lease-to-Own program touts instant gratification -- customers without credit take a product home right away, make biweekly payments, then decide whether to buy out or return the product. A typical deal could turn a $300 television into a $415 purchase."
  • "Kmart’s lease-to-own program...begins Nov. 22…"


Takeaway: Great…Kmart is becoming Rent-A-Center, just in time for the holidays.  The sad thing is that the plan will probably work -- even though it shouldn’t.


VNCE - More Details Emerge on Vince IPO



  • "The brand’s corporate parent, Apparel Holding Corp., said it plans to sell 10 million shares at $17 to $19 each in its initial public offering, according to a regulatory filing. That stake represents 28 percent of the company."


ODP - Roland C. Smith Appointed Chairman and CEO of Office Depot, Inc.



  • "Office Depot, announced the appointment of Roland C. Smith as Chairman and CEO, effective immediately."
  • "Most recently, Smith was the Chief Executive Officer and President of Delhaize America, LLC...Previously, Smith was President and CEO of The Wendy’s Company; President and CEO ofWendy's/Arby's Group, Inc.; and CEO of Wendy's International, Inc." 


HMB - H&M Grabs More Control of Factories Amid Bangladesh Unrest



  • "H&M this year agreed to become the sole client of two factories in Bangladesh and one in Cambodia, helping convince building owners to offer satisfactory conditions and wages, Anna Gedda, H&M’s social sustainability manager, said."
  • "H&M...has a long-term commitment to the plants, she said, without disclosing their location or the length of the exclusivity agreements."




What’s Selling: Outdoor




  • Chippewa Super Logger
  • Keen Gypsum
  • Haflinger felted clogs

Top trend: “We’re stoked to see the Chippewa Super Logger [workboot] sales picking up, because that means people are working,” said buyer Frank Gibbons.

BACK COUNTRY, Des Moines, Iowa

  • Merrell Spice Glove
  • Wolky Diana 
  • Merrell Rosella Lace 

Top trend: “Customers are looking for styles that are a mix: a good winter shoe that holds up but has some style to it,” said Austin Zepeda, office manager. “They’re looking less for the traditional big, heavy, clunky things and [more] for hybrid styles.”

PEAK SPORTS, Corvallis, Ore.

  • Sorel Joan of Arctic
  • Merrell Moab Ventilator Waterproof
  • Keen Targhee Mid Waterproof

Top trend: “Things are starting to cool off, and we’re seeing sales pick up in fashion winter boots,” said Melissa Cherbas, footwear buyer. “And what stays strong for us is multiport waterproof. It’s been our mainstay.”


US Senate Pushes Affordable Footwear Act



  • "The Affordable Footwear Act (S.1633)…[would] assist low income families struggling to purchase affordable shoes due to what many argue is an inordinately high import duty, which can reach 65% in some instances. Compare this to the average import tax on consumer good in general: 1.4%. Since more than 98% of all shoes purchased in the US are imported, it’s all but impossible to avoid what some consider to be a hidden tax."
  • "In total, if the bill should become a law experts estimate that it would eliminate as much as $800 million in duties on children’s shoes, a considerable chunk of the $2.3 billion in duties collected overall in 2012 for footwear."
  • "Advocates of the Affordable Footwear Act argue that these inflated duties function as a regressive tax on the poorest families who are disproportionately disadvantaged by them. Combined with state taxes and retail markups, it’s not unusual that a pair of children’s boots, priced at $10 when it arrives at the US border, costs more than $30 at the store."


Visa: E-commerce sales up 17% in first 10 months of 2013



  • "In the first 10 months of 2013, e-commerce sales are up 17% from the same period last year, according to the Visa Spending Intentions survey. To-date in 2013, Visa domestic e-commerce transactions exceeded one billion dollars on 211 days, an increase of 19% from 2012."


Bangladesh board to finalize RMG workers’ wage on Nov 21



  • "The Bangladesh Wage Board is set to finalize the minimum salary structure for ready-made garment (RMG) workers on November 21, 2013, announced Labor Minister Rajiuddin Ahmed Raju after a recent meeting with the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) and the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA)."
  • "The Government and the Wage Board will finally announce the minimum wage for the entry level RMG workers on November 21, where the Government would mention regulations for the workers as well as the owners, the Labor Minister said."
  • "Mr. Ahmed Raju said the decision would be beneficial to both the workers as well as the employers and he urged the RMG workers to return to working in the factories, which were closed due to the labor unrest."




Danger Deflation!

“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.” -President John F. Kennedy


As stock and bond market operators, we all know full well that the world is laden with risks.  For any investment, there are macro risks, industry risks, and company risks, to name a few.  As portfolio managers, there are then the universal risks of timing and sizing, which can be critical to performance and ultimately job risk.


On the macro level, I recently happened upon President Kennedy’s quote above and it made me ponder a risk we actually think about very frequently at Hedgeye – government risk.  In this case, Kennedy’s quote refers to the specific issue of taxation and its impact on the economy. 


There are some analysts out there who believe a dollar sent to the government is no different than a dollar left in the hands of the consumer or investor.  Without getting into politics, hopefully the recent debacle over the website for the affordable care act reinforces this idea that government is inefficient at allocating capital, particularly to new businesses. 


Back to the global macro grind...


The one government risk that is improving is the risk of rising federal deficits.  As we highlight in the Chart of the Day, the federal deficit as a percentage of GDP peaked in fiscal 2009 (Obama’s first year in office) and has declined steadily to -4.1% in this fiscal year ending September 30th.   On a notional level, the deficit has declined from -$1.4 trillion in 2009 to -$680 billion in 2013.


Certainly, running an almost $700 billion deficit into the fifth year of a “recovery” is nothing to get overly excited about.  But one marginal positive point, which we do need to give our elected officials credit for, is that actual federal government outlays have declined sequentially for the last two years by -1.8% in 2012 and -2.4% in 2013. And, frankly, the obstructionist “Tea Partiers” probably deserve the most credit for this improvement.


From an investing perspective, this decline in deficit is certainly a positive tailwind for the U.S. dollar.  It takes off the table certain questions of U.S. credit worthiness and the likelihood of future tax increases, which bode more positively for future GDP growth.  As painful as the budget debates have been in the last couple of years, this novel approach of cutting spending and growing the economy has worked.


As quietly as the deficit as improved, the fourth branch of government, the Federal Reserve, appears to be no closer to getting out of the way.  Instead of protecting against inflation, as has historically been the case, the Fed now seems overly focused on the omnipresent evil known as: deflation.  The top headline on this morning says it all:


                “Central Banks Risk Asset Bubbles in Battle with Deflation Danger”


The premise that deflation is dangerous resolves largely around the concept that as consumers begin to see that prices are falling they will hold off on purchases in anticipation of lower prices.  Secondarily to this is the idea that in an inflationary environment, inflating assets will allow consumers, and the government, to pay off debts quicker. 


Call me a simpleton, but personally I’m going to pay off more debts when I have more excess cash flow, not due to lower prices for basic goods (food and energy) or lower taxes.   Even if I agreed with the concept of inflation as a way to pay off debts, the broader issue is changing the definition of CPI does not mean deflation exists.  In fact, based on the MIT billion prices index, inflation has been solidly at over 2% for most of this year.


The biggest challenge with the ever moving inflation, GDP and employment goal posts of global central banks is that it breeds contempt and confusion, which ultimately leads to increased volatility (we’ve seen this in spades in the interest rate markets this year).  The longer term issue of central banks trying to save us from every economic threat known to man is that when we do eventually unwind this extreme policy, it will be excruciatingly painful.


Another challenge of course is that central banks have limited room to stimulate from current levels.  As Bridgewater's Ray Dalio recently wrote:


“Because central banks can only buy financial assets, quantitative easing drove up the prices of financial assets and did not have as a broad effect on the economy.  The Fed’s ability to stimulate the economy became increasingly reliant on those who experience the increased wealth trickling it down to spending and incomes, which happened in decreasing degrees (for logical reasons, given who owned the assets and their deceasing marginal propensity to consume) . . . the marginal effects of wealth increase on economic activity have been declining significantly.”


In essence, the more central bankers attempt to stimulate from current levels the less and less impact it will have on real economic activity. 


Luckily for us, not every central banker in the world wants to pursue an activist strategy and attempt to manage every ebb and flow of the global economy.    Fellow Canadian and BoE Governor Mark Carney actually seems rather content to let the improving economy do its thing and not, like his ECB counterparts, double down on easing.  As a result, Carney is also raising his 2014 GDP forecast for the United Kingdom to 2.8%.  Long the pound remains one of our top macro ideas.


Speaking of activists, it was nice to see Dan Loeb from Third Point show up in one of our Best Ideas, Fed-Ex.  The stock is up more than 25% since we added to our Best Ideas list on February 27th of this year and may have more room to run.  If you’d like to learn about access to our Industrials Sector and go through our 60 page presentation on Fed-Ex, ping .


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.66-2.81% (bullish)

SPX 1 (bullish)

FTSE 6 (bullish)

Shanghai Comp 2067-2044 (bearish)


VIX 12.22-14.51 (bearish)

USD 80.85-81.39 (bearish)

Pound 1.58-1.60 (bullish)

Euro 1.33-1.35 (neutral)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Danger Deflation! - chartoftheday


Danger Deflation! - rtawoowoo